Year 2000

Methodological work

Activities of Banking Supervision in 2000 were focused primarily on completion of all tasks set forth in the Medium Term Conception. All activities were driven by the effort to complete the legislative platform for banking supervision as to make it compliant with the Directives of the European Union and international best practice as presented in "Core principles for effective banking supervision" issued by the Basle Committee for Banking Supervision of BIS.

In 2000, provisions of CNB covered almost all the main risk areas of banks, and attention was therefore aimed at areas not yet covered by regulatory rules and at perfecting existing provisions in terms of their methodology.

In April, a CNB Provision on Capital Adequacy, inclusive of market risk, came into force; it represented a qualitative shift in the field of risk assessment and risk management. In addition to provisions laying down the rules for operational risk coverage of credit and market risk, the document contains limits for credit exposure and limits for open foreign exchange positions of banks. A proposal was prepared for an amendment to a Provision on Liquidity, which was later approved in April 2001. Furthermore, a Provision on Disclosure of Banks was amended as to include the duty to disclose the structure of the banking group, including information on entities which are a part of the group. In pursuit of a better quality of information disclosed, Banking Supervision co-operated on the preparation of a provision of the Ministry of Finance of the Czech Republic concerning the contents of financial statements and annual reports of banks. An important activity on the part of CNB was the preparation of an amendment to the Accounting Act, to bring it closer to the International Accounting Standards, to come into effect as of 1 January 2002.

In 2000, the Twinning Program launched in 1999 continued its course. For each of the six parts of the program - market risk management, supervision on a consolidated basis, determination of individual operational risk adequacy based on a bank's risk profile, analysing a bank's financial position and on-site examinations - a detailed list of individual tasks was made, detailing deadlines for their completion. An important part of the two-year project which is delivered by partner banking supervisory authorities from Germany and Greece is also a wide range of training activities, aimed at broadening the qualifications of officers of Banking Supervision.

Co-operation with other financial markets regulators was extended by way of a tri-partite Agreement on Co-operation between CNB, KCP (the Securities Commission) and the Ministry of Finance of the Czech Republic, which, in 2000, established four working parties covering consolidated supervision, execution of supervision, disclosure and licensing. Banking supervision also actively co-operated with the Banking Association (amendment to the Accounting Act, internal auditing standards, regulatory rules for banks, the Central Register of Credits Project) and with the Chamber of Auditors of the Czech Republic (establishment of informal contacts and approximation of views).

In the area of international co-operation, CNB Banking Supervision collaborated in particular with the Basle Committee for Banking Supervision of BIS (harmonisation with EC law, participation of CNB delegates in working groups concerned primarily with the new New Basle Capital Accord). At the end of the year, CNB engaged in the FSAP (Financial Sector Assessment Programme) Project under the auspices of the International Monetary Fund and the World Bank, concerned with assessing the strength and stability of the financial sector in the Czech Republic.

In June 2000, in close co-operation with the Banking Association and individual banks, the project for development of a Central Register of Credits was launched, with the ultimate aim of reducing credit risk. With respect to the predominant activities of banks in this area, in addition to the underdeveloped market environment in the country, this type of risk is a major concern. CNB, on the basis of legislative grounds created by the amended Act on Banks, decided in 1998 to operate a Central Register of Credits, to allow banks fast access to information on credit charge of clients. The register is developed as an complete one, to be contributed to by all banks and foreign bank branches licensed to operate as a bank, on a mandatory basis. The register will be used exclusively by banks and branches of foreign banks. The Credit Register is developed as an open system, permitting modular enhancements based on requirements of the banks. The register is scheduled for regular operation as of the end of 2001.

Control and analytical work

In 2000, Banking Supervision continued to monitor the development of banks by means of two parts of discharge - off-site supervision and on-site examinations. Basic analytical outputs are the monthly information and the regular quarterly analyses of the banks' financial situation. The financial analysis puts emphasis in particular on aspects of prudence in the business of the banks. As a part of analytical activities, like every year, quarterly analyses of the banking sector development were elaborated, including the banks' rating, for discussion in the CNB Bank board and a regular report of banking supervision was published for the public at large. For the first time, a so-called new-type analysis of the banking sector was made; the difference lies in a greater emphasis on macroeconomic context of the banking sector development.

A part of the off-site supervision is also the adoption of relevant decisions and issuing approvals in respect of the banks, under the Banking Act currently in force. In 2000, Banking Supervision adopted the total of 21 decisions in administrative proceedings, of which two imposed sanctions; the remaining decisions amended previous approvals and licences to operate as a bank. In 12 instances, provisions of penal character were adopted outside the scope of administrative proceedings. Additionally, Banking Supervision issued opinions concerning persons nominated for Boards of Directors of banks, based on 32 interviews with candidates.

On-site examinations were concentrated on reviewing risk management systems of banks, internal controlling systems of banks, evaluation of financial positions of banks, and scrutiny of reporting systems. Based on the plan of on-site examinations in banks, in 2000 the total of 11 on-site examinations were made, 9 of which were comprehensive (covering all activities of the bank) and 2 were partial (covering a selected area of activity). The gradual development in the way banking supervision is discharged and the need to shift the focus of on-site examinations to reviewing risk management systems, discovered the exigency for specialisation of individual banking supervisors on a selected type of risk. Starting in 2000, alongside the on-site examination teams, working groups began to operate, associating members of the on-site examination teams on the basis of their professional specialisation (credit risk, market risk and internal controlling systems, internal audit). In order to make on-site examinations more efficient, in 2000 Banking Supervision started to prepare a new methodology for organisation of the examinations.

An important instrument of off-site supervision are informative visits, collecting always a specific type of information. They focus primarily on the bank's strategy and performance results, partial examinations of the credit portfolio, functioning of the bank's controlling mechanisms, compliance with measures imposed and, last but not least, preparation of on-site examinations. In 2000, at least one such call was made to the total of 30 banks.

Organisational arrangements for banking supervision

The organisation structure of Banking Supervision did not incur any principal changes in 2000. Activities of Banking Supervision were, as in the past, provided for by two departments. In the department Banking Supervision Policy, the analytical department increased its staffing by 4 new employees, to provide for the new agenda of the Central Register of Credits. In the department Banking Supervision, the four independent departments of off-site inspectors and one controlling team, in addition to a department of non-standard activities, continued to operate. Discharge of banking supervision was adversely affected by the understaffed situation, in particular in the team of on-site examinations. The situation was being solved by recruitment of new employees. The actual number of staff was approximately 95.

The banking sector

The number of banks in the banking sector declined in 2000; the sector comprised 40 banks and branches of foreign banks. The reduction in the number of banks was a result of a merger of Erste Bank Sparkassen (CR), a subsidiary company of the Austrian bank operating on our local market, and Česká spořitelna, following the privatisation of the state stake in Česká spořitelna by the Austrian bank. Banka Haná announced the end of its operations, following a period of only rudimentary activity. No banking licences were revoked for reasons of bad management in the course of the year.

Activities of Banking Supervision were directed to the area of forming the structure of the banking sector. At mid-year, Banking Supervision participated in working out the crisis of Investiční a Poštovní banka, a.s. In the course of June 2000, Investiční a Poštovní banka experienced an acute liquidity crunch, caused principally by the sharp and vast decline in the volume of the bank's primary deposits, and had serious solvency problems. The unwillingness of the top management of the bank and its shareholders to adopt efficient measures to resolve the crisis and to address its underlying causes, in combination with the systemic importance of the bank in the context of the stability of the whole banking sector, produced the need to address the bank's emergency by imposing conservatorship on 16 June 2000. Following an evaluation of the total situation of the bank's management and obtaining a prior consent of the Czech National Bank, the conservator entrusted with the conservatorship concluded an agreement on the sale of company Investiční a Poštovní banka to Československá obchodní banka. The process of privatisation of state stakes continued in 2000 by closure of the sale of Česká spořitelna to Erste Bank Sparkassen of Austria. Consequently, Erste Bank Sparkassen (CR) and Česká spořitelna merged. The preparation of privatisation of the state stake in Komerční banka continued. Restructuring of transformation institutions (Konsolidační banka Praha, s.p.ú., Českomoravská záruční a rozvojová banka, a.s., Česká finanční, s.r.o.) was being prepared.